Credit Cards Online Information

As the technology barriers to e-commerce fall, more and more small businesses are looking to take their sales online, eager to tap into a pool of online consumers that IDS projects will reach 128 million by 2002. E-commerce application and hosting service providers make it relatively simple and inexpensive for Web-enabled businesses to turn their home pages into full-fledged online stores, opening up the e-commerce arena to even the smallest businesses. However, there's a hidden danger that many newly minted e-business owners fail to take into consideration: the problem of credit card fraud.

While conventional wisdom holds that merchant fraud is the main form of credit card abuse, the reality in the e-commerce world is that the merchants are far more frequently the ones defrauded, whether through credit card theft or so-called "friendly fraud," in which customers dispute the charges but nevertheless keep the merchandise. A survey conducted by the Gartner Group this year of major online retailers has shown an average of 2.64 percent of Internet transactions are charged back, compared with 1.24 percent among bricks-and-mortar retailers. Gartner research also shows that credit card fraud is at least 10 times as prevalent online as in the physical world, accounting for 1 percent of all e-commerce transactions.

The issue may not even occur to many business owners as a potential problem. After all, in the world of the physical store-front, credit card companies typically shoulder the risk in the case of fraudulent or disputed charges. So long as the merchant can provide a receipt with a customer signature, that merchant cannot be held responsible for charges that have been approved by the card issuer.

In the online world, things are very different. Merchants are frequently surprised to discover that they are held responsible for the entire cost of charge-backs, whether due to disputed charges, credit card theft, or any other cause. This is because, more often than not in a disputed online transaction, the merchant cannot produce a customer signature, and thus cannot definitively prove that the goods or services were provided to the customer. Merchants may also be liable for "investigation" fees to the credit card company that can amount to $25,000 a month if their charge-backs are consistently over a pre-defined percentage, which in many cases is as low as 1 percent. Merchants with high charge-back rates also risk having their accounts shut down entirely.

Since as many as 98 percent of e-commerce transactions are currently conducted via credit card, online retailers have no choice but to expose themselves to these risks if they want to succeed. Other payment options, such as Internet cash, e-checks, and other mechanisms have not achieved anything like the prevalence they would need to offer a viable alternative, and, in any case, credit card transactions are preferable to other methods of payment because they provide better customer information and instant approval.

Unfortunately, no simple technology solution to the problem of card-not-present credit card transactions is on the horizon, but credit card companies have made some efforts to enhance security. Visa/MasterCard offered a scheme called security-embedded transactions (SET) two years ago, but the program proved too complicated to administer, requiring customers to download software and certificates. American Express recently debuted a feature that allows customers to create one-time-use credit card numbers. And Visa/MasterCard has begun adding a three-digit number to the back of a credit card (called CVV2) that can offer an additional level of proof-of-ownership. The problem is that customers have little incentive to participate in these programs since they're indemnified against losses by the credit card companies anyway. And neither credit card companies nor merchants are interested in making life more difficult for the online consumer.

At present, the only effective method for merchants to reduce their exposure to charge-backs is by taking steps to control fraud prior to processing the transaction. Fortunately, there are some common-sense techniques that have proven effective in significantly reducing charge-backs:

1. Employ Real-Time Processing: Small businesses typically pay significantly higher fees (as much as 66 percent higher than for physical transactions) for the ability to process card-not-present transactions; nevertheless, real-time processing is invaluable, not only for making the customer happy but also for reducing fraud. Real-time authorization from a clearinghouse such as FDR provides a first line of defense against credit card fraud, instantly notifying the merchant in the case of a stolen card or credit problem.

# posted by Medical Information : 11:42 PM